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Business Law

Thursday, March 8, 2018

Family Businesses: Simple Steps to Avoid Common Pitfalls


Family Businesses: Simple Steps to Avoid Common Pitfalls

If you have a family business or are thinking about starting one, kudos to you! There are few better ways to create tradition, meaning and bonds within a family, and a family business can be a gratifying way by which to build wealth.

Family enterprises, however, can bring conflict, legal challenges and financial distress when simple preventative steps are not taken. A business law attorney can assist you with the following issues commonly faced by family businesses:

  • The absence of a succession plan. If the leader of a business dies, sells or becomes incapacitated, the business he or she leaves behind will appoint a leader, somehow, by necessity. The succession process at that point, however, will likely be complicated, and the result may not be optimal for the business or your family.
    Read more . . .


Tuesday, February 27, 2018

Top 3 Real Estate Tips for Small Businesses


Top 3 Real Estate Tips for Small Businesses

The only real estate transaction most small businesses engage in is to enter into a lease for commercial space. Whether you are considering office, manufacturing or retail space, the following three tips will help you navigate the negotiation process so you can avoid costly mistakes.

 

“Base Rent” is Not the Only Rent You Will Pay

Most prospective tenants focus their negotiation efforts on the “base rent,” the fixed monthly amount you will pay under the lease agreement. You may have negotiated a terrific deal on the base rent, but the transaction may not be the best value once other charges are factored in. For example, many commercial lease agreements are “triple net,” meaning that the tenant must also pay for insurance, taxes and other operating expenses.
Read more . . .


Monday, January 8, 2018

Purchasing a Business: Asset vs. Share purchase.

Purchasing a Business: Should You Consider Buying Assets as Opposed to Shares?

Of the two common methods used when buying a business, the purchase of shares and the purchase of assets – the asset-purchase option is perhaps the least understood but in many cases the most advantageous. They offer the following benefits:  

 

  • In some states, the sale of all or most of a business’s assets requires the majority vote of the business’s shareholders, but the transaction is not subject to the appraisal rights of shareholders who did not vote in favor of the sale.
  • When buying a business’s assets, a buyer can elect to purchase only selected assets. In doing so, he or she avoids exposure to liabilities and minimizes risk.
  • When a buyer purchases a business’s assets he or she can allocate the purchase price among the assets to reflect the fair market value of each asset. This legal right offers two opportunities: 1) a step-up of the tax basis, 2) higher depreciation and amortization deductions, both of which lead to future tax savings.
  • The avoidance of double taxation in the event the target business is an S-corporation, LLC or partnership.

The above advantages are significant but must be balanced against potential disadvantages. These include:

  • Asset sales can be complex in that they typically require the consent of third parties regarding, for example, office space leasing, contract assignments and permit transfers. Since third parties may use the transaction to renegotiate contracts, delays and cost increases are often experienced.
  • When buying a business or a percentage of a business, it’s often not necessary to delineate exactly what you are buying. This isn’t usually the case when purchasing a portion of assets. Instead, the buyer will likely need to define the specific assets he or she wishes to acquire. If the buyer is acquiring a subsidiary or a division, he or she typically acquires the assets that are used exclusively or primarily by that business unit. However, “shared assets” can cause legal confusion, and it’s usually necessary to negotiate their cost and transfer and/or licensure.
  • If the target business is a C-corporation, it is subject to double taxation in the event of an asset sale.
  • If there are any disclosed or undisclosed liabilities that the buyer is not including in the purchase, there is a risk that the transaction will violate fraudulent conveyance laws on the part of the target business, which may ultimately impact the purchaser who might be compelled to reverse the transaction.

Perhaps it’s because of these serious disadvantages that less than a fifth of all acquisitions are structured as asset purchases. Nonetheless, it makes sense to consider all options when deciding how best to structure any acquisition. Please consult an experienced attorney to assist you with your due diligence before signing any purchase agreements or contracts.      


Thursday, December 28, 2017

Non-Compete Agreements

Non-Compete Agreements 

Courts typically disfavor “covenants not to compete” or “non-compete agreements.”  Therefore, the terms and provisions of these contracts must not be overly restrictive of the employee.  In order for a non-compete to be upheld, the document must “be reasonable in scope, geography, and time.”  It cannot last for years on end, or prevent the employee from working anywhere in the entire state. Likewise, an employer cannot prohibit an employee from working in a large variety of industries, especially if the restriction includes industries wholly unrelated to the employer’s line of work. 

Two other elements are analyzed by a court to determine the validity of a non-compete agreement:  (1) there must be mutual consideration between both the employer and employee at the moment the contract is signed and (2) the non-competition agreement must protect “a legitimate business interest of the employer.”  Preventing a former employee from working for an employer’s business rival, or preventing disclosure of trade secrets or personally identifiable information of important clientele, are typically considered justifiable business interests.

Non-compete agreements are generally implemented to protect a company’s most important assets:  its reputation and its confidential information.  However, the terms protecting these assets cannot be overly broad or vague.  Thus, in evaluating the “reasonableness” of a non-competition agreement, the court will conduct a “balancing test.”  This is a comparison of the employer’s need to protect its “business interests” with the “burden that enforcement of the agreement would place on the employee.” 

The validity of non-compete agreements is decided on a case-by-case basis. The court will consider circumstances such as the length of time certain information will be kept confidential, and the company’s reasons for limiting the employee's job search to a geographical area. If the court finds that the agreement serves a valid interest and does not exceed the range necessary to protect that interest, the entire agreement may be upheld. 

The court also has the option of doing away with overly intrusive terms in a non-compete, rather than invalidating the agreement entirely. In cases in which a non-compete is perceived by the court as punitive, unduly restricting an employee from obtaining employment, the agreement will not be upheld.  A licensed attorney who specializes in employment law will be able to gauge the likelihood that a particular non-compete agreement will be enforceable.


Monday, November 27, 2017

At-Will Employment

At-will Employment: Does it Apply to You?

It may seem unfair, but an employer can fire an “at-will” employee at any time, without good cause – or even without any cause at all. It is a bitter pill, and one that many workers must swallow. Under Kentucky law, you are generally deemed to be employed at-will, unless you can prove otherwise.

Workers who are employed at-will can be fired for no reason, but they cannot be fired for a protected reason. Some reasons are illegal under federal or state law, exceptions to the general doctrine of at-will employment. For example, you cannot be fired for complaining about discrimination, harassment, or safety violations in the workplace, or for complaining about illegal activity. The majority of employers are subject to anti-discrimination laws and cannot fire you based on certain characteristics, such as gender, race or religion. Similarly, you cannot be fired because you have exercised a legal right, such as taking time off for family and medical leave, military service, jury duty, or voting in an election.

Many employers take steps to ensure that the at-will nature of the employment is clearly established and agreed-to by all parties. This is typically spelled out in employment applications and contracts, employee policy and procedure manuals, and may be described as “at-will employment” or simply contain statements that you can be terminated at any time “without cause” or “for any reason.”

Still others have implemented written policies that protect their employees against being fired without good cause, and specify the reasons for which an employee can be terminated. If your employer has adopted such a policy, you are entitled to those protections.  Likewise, if you have signed an employment contract guaranteeing you job security, your employment is not at-will and you are entitled to the protections contained in the written agreement.

Should you sign an at-will employment agreement? Courts have generally held that an employee can be terminated, or not hired, for refusing or failing to sign an at-will employment agreement.While you are not technically required to sign the agreement, if you want to get hired or keep your job, it may be in your best interest to sign the agreement.

Nevertheless, if the at-will agreement contradicts what your employer previously promised you, you may want to think twice about signing on the dotted line. If you relied on the employer’s promises of job security when you accepted the position, you should consult an attorney before signing an at-will agreement. Courts will presume the signed at-will agreement controls your employment, regardless of any prior statements to the contrary.

Just because you sign the at-will agreement does not mean your employer will use it to fire you without cause. There is little to be gained in terminating a productive employee, and most employers will attempt to work with you to resolve any issues. Ultimately, the best way to avoid the perils of at-will employment is to be an outstanding employee. Delivering exceptional job performance is good for the company’s bottom line – and your own.  


Wednesday, October 25, 2017

Employment Discrimination Laws in a Nutshell

Employment Discrimination Laws in a Nutshell

There are a variety of state and federal laws that make it illegal for employers to discriminate based on certain characteristics when making decisions about hiring, terminating, promoting, demoting or compensating employees, or any other terms and conditions of employment. Employers are also barred from retaliating against employees who file a discrimination-related complaint or engage in other protected activities. While the laws vary from state to state, all employers have an obligation to adhere to the following federal laws.

Title VII of the Civil Rights Act of 1964

This law prohibits discrimination in the workplace based on race, color, national origin, religion and gender. Title VII also established the Equal Employment Opportunity Commission (EEOC), the government agency that is tasked with investigating employment discrimination claims.  Before an employment discrimination lawsuit under federal law can be brought, it is necessary to file a claim with the EEOC. Title VII applies to employers with 15 or more employees.

Age Discrimination in Employment Act (ADEA)

The ADEA prohibits employers with 20 or more employees from discriminating against individuals who are 40 years or older and their age cannot be used as a factor in any employment decision.

The American with Disabilities Act (ADA)

The ADA prohibits employers with 15 or more employees from discriminating or harassing disabled employees and requires employers to make reasonable accommodations that will enable a qualified disabled worker to complete his or her job functions.  

The Pregnancy Discrimination Act (PDA)

The PDA prohibits discrimination based on pregnancy regarding any aspect of employment in businesses with 15 or more employees. Women who are temporarily unable to perform their jobs due to pregnancy must be treated similarly to other temporarily disabled workers. The ADA may also protect a woman who suffers from a pregnancy related medical condition.

The Bottom Line

In sum, employers are prohibited from discriminating against employees and potential job candidates because of race, religion, sex, age, disability, pregnancy or national origin. Not only can violations lead to financial penalties, a discrimination lawsuit can damage a business' reputation. By engaging the services of an experienced employment law attorney, you can establish policies and procedures to ensure that your business is in compliance with these laws. 

 


Friday, October 20, 2017

The Risks of Tenant-In-Common Investments

The Risks of Tenant-in-Common Investments

Historically, tenant in common (TIC) projects were owned by a relatively small group of investors who knew each other, such as long-time friends, business partners or family members. Strategies to maximize tax savings and preserve equity typically guided investors to this type of structure, rather than creating a limited liability company or partnership to own the property.

In the late 1990s, real estate sales in the form of tax-deferred 1031 exchanges created a new industry. Promoters began soliciting and pooling funds from investors to purchase real estate. Participation in the pool helped investors find replacement property to guarantee their capital gains tax deferment continued.

In 2002, the IRS clarified when this type of pooling is considered a partnership interest as opposed to a TIC interest, a critical distinction for investors using funds from a 1031 exchange transaction. Following that, investments in TIC interests grew considerably due to the numerous advantages. For those who needed a place to invest their 1031 exchange funds quickly, TIC interests provide a relatively simple way to ensure the funds are spent within 180 days of the sale of the previous property, without the hassle of researching, investigating, negotiating and financing a property in less than six months. TIC investors do not have to burden themselves with the day-to-day management of their investment property. Finally, TIC investors can pool their resources to purchase fractional shares of investment-grade property which would otherwise be out of reach.

With all of its advantages, the TIC interest also carries its share of risks. For example, many TIC promoters charged fees that were excessive, or sold the property to the investors for more than it was worth. If property values decline or purchase loans mature, it may be difficult to refinance, forcing the property into foreclosure and taking the entire investment with it.

Other promoters failed to maintain reserve funds separate for each property. If a promoter filed for bankruptcy and did not properly use the reserve funds, TIC investors were left with no recourse and were forced to cover the reserves out of their own pockets or risk losing their investment.

Further risks are caused by the investors themselves and the nature of their relationship to one another – or lack thereof. Owners of TIC typically do not know each other. Decisions regarding TIC governance often require unanimous agreement by all owners, and just one objection can grind the action to a halt. When owners don’t know each other, or are spread across many states, it can be difficult to communicate and obtain a unanimous agreement.

Despite the risks, TIC interests can still be a good place to park your money – but you must be a cautious, diligent purchaser. Visit the property, seek information from sources other than the promoter, and carefully review the past and projected financial data.
 


Thursday, September 28, 2017

Oral Contracts & the Statute of Frauds

Oral Contracts & the Statute of Frauds

 

There is a widespread misconception that verbal contracts are unenforceable.  Nevertheless, a contract made orally with another party, without embodying the particular terms in a signed writing, can still be valid and binding. Even so, any disagreement concerning the deal may pose multiple problems for both parties.  In order for the court to give a verbal contract legal effect, the terms of the deal will have to be demonstrated. This could involve pricey litigation and an extensive discovery process.  Therefore, it is advisable to have an attorney draft any contractual agreement.

Moreover, according to the Statute of Frauds, there are certain contracts that must be in writing in order to be legally binding.  This may include contracts for the sale of land or real estate, surety agreements, in which one person guarantees to take over another's contractual obligations, and service agreements that take over one year to complete.  Other agreements that must be written to be legally binding may include agreements “made in the consideration of marriage,” or those made for the sale of goods valued at $500 or more. If the requirements for contractual validity are not met, either party runs the risk of the other party rescinding the contract by declaring it void.

The Statute of Frauds not only aims to prevent deception or fraud; it requires precise terms to be set in writing for a contract to be valid. The Statute of Frauds typically requires the document to include a description of the “subject matter” of the agreement, the main stipulations to the deal, and the signatures of the parties.  Nevertheless, these requirements may vary with the sale of goods under the Uniform Commercial Code, where a signature by the “party to be charged” may be sufficient.  For a sale of goods, the terms typically should include the price and quantity of the goods. 

Sometimes, if the contract is unenforceable under the Statute of Frauds, it may be saved if one party suffered by relying on the contract and if the injured party can prove this reliance in court.  Likewise, an exception may exist if “specially manufactured goods” were provided under the contract or one party “partially performed” what was required by the agreement.  The outcome may also vary if two merchants were the contracting parties.  Seek advice from a licensed business law and contract attorney to evaluate agreements and determine whether they are legally enforceable. 


Monday, September 18, 2017

Benefits of Incorporating in Safe-Haven States

The Benefits of Incorporating in Safe Haven States

Many business owners believe it's best to incorporate in their home state, but there are often business and tax advantages available in other states. In particular, Delaware and Nevada are attractive to those who are looking to form a corporation. These so-called corporate haven states are considered to be business friendly.

The State of Delaware is well regarded for its supportive business and corporate laws, said to be among the most favorable in the United States. In addition, the state has a judicial body, the Court of Chancery, that is dedicated to business matters. This exclusive focus allows the court to hear cases quickly and efficiently.

Delaware also features a government agency that is focused on supporting businesses, the Division of Corporations. In particular, this agency has streamlined procedures for incorporating that allow businesses to hit the ground running. The Division boasts long hours and provides new businesses with easy access to important resources.

Lastly, the tax law in Delaware is amenable to corporations. A corporation that is formed, but does not conduct business, in the state is not liable for corporate income tax. Moreover, there is no personal income tax for those domiciled in the state or for shareholders that do not reside in Delaware.

Nevada is the second most popular state in which to incorporate. The state's business law affords favorable treatment to corporations. In particular, owners and managers of a corporation are rarely held responsible for the actions of the corporation in the state. Nevada also offers advantageous tax treatment to corporations with no personal income, franchise or corporate income tax.

Depending upon the exigencies of your business,  incorporating in Delaware or Nevada might be the best alternative. By engaging the services of an experienced business and tax law attorney, you can take advantage of these corporate safe havens.

 


Wednesday, August 23, 2017

How to Negotiate a Commercial Real Estate Lease

How to Negotiate a Commercial Real Estate Lease

There are number of considerations for business owners involved in negotiating a commercial lease, not the least of which is the fact that the main objective of landlords is to maximize profits. By understanding the following fundamental concepts, it is possible to make a good deal.

Market Conditions

First, understanding the market conditions for commercial properties is crucial. Generally, pricing is based on square footage, but there is a difference between "usable" square feet and "rentable" square feet.

Rentable square feet is the actual measurement of the space that is being leased. However, rates are typically quoted based on usable square feet which combines the space with a percentage of common areas such as lobbies, hallways, stairways and elevators.

In addition, commercial leases are considered "triple net." This means that tenants are also required to pay for taxes, insurance, and maintenance for a unit as well as a percentage of these costs for the common areas. By understanding these market conditions and the rate other businesses are paying for similar units, it is possible to negotiate the appropriate rate.

The Term

There are a number of factors involved with the term of a lease. For some businesses, such as retail stores or medical professionals, having a stable location is essential for attracting customers and patients, respectively. With this in mind, the term should be long enough to minimize rental increases, but sufficiently flexible to avoid getting locked in. This goal can be accomplished by negotiating terms of one or two years with renewal options.

Repairs, Maintenance, and Build-outs

It is also important for a commercial lease agreement to establish which party is responsible for paying  repair and maintenance costs of the space, building and grounds. In some cases the tenant pays for insurance, custodial services and security costs unless the landlord agrees to pay for a portion or all of these expenses. In addition, if new space is being leased, landlords will often agree to pay for the costs of "buildouts" to customize the space, or offer the tenant a rental abate instead.

Options and Incentives

By establishing a track record of making timely rental payments, it is often possible to renegotiate the lease to obtain more favorable terms. Although a lease may contain renewal options, it may not be necessary to exercise them automatically. At times, market conditions may change, in which case a new lease should be negotiated.

The Bottom Line

In the end, business owners face a number of challenges, and negotiating a commercial lease can have a significant impact on the company's long term success. For this reason, it is essential to engage the services of an experienced real estate attorney.

 


Monday, August 14, 2017

Patents

Patents

Inventors have a right to protect their inventions through the United States Patent and Trademark Office (USPTO). With the creation of a device come a bundle of property rights issued by the United States Government.   A patent prevents all “others from making, using, or selling the invention in the United States.”  The patent may survive for varying periods of time, depending on what type of patent is applied for and issued. Typically, protection does not activate until the patent is legally granted. 

Not all creations can be patented.  Only a device that is “new, non-obvious and useful” may qualify for a “utility patent.”  Abstract or theoretical concepts or ideas may not be protected by means of a patent.  Likewise, an invention is not patentable if it has been “publically disclosed.”  In order to determine this, patent searches should be conducted prior to filing an application. These searches may be very complex and an attorney’s instruction is advised.

Creations that cannot be approved under patent law may still be protectable through another method, such as trademark or copyright law. An intellectual property (IP) attorney can help advise clients about making the appropriate distinctions. An IP attorney is available not only to educate clients on the various application requirements for all types of intellectual property, but is prepared to provide provisional or non-provisional applications for patents. A non-provisional application establishes the filing date of the patent application, beginning the application process.  A provisional application only establishes the filing date and automatically expires after one year.

If there is more than one person involved in the creation of an invention, the partners may need to file an application as "joint inventors." Unfortunately, there are often disputes concerning which individual actually created the invention; sometime both parties claim to be the "sole inventor." Usually, after thoroughly analyzing all the facts, the attorney(s) can determine whether one or both inventors have the right to file the patent or whether they should file jointly.

There are several fees involved in obtaining a patent license, including filing, issuance, and maintenance fees.  An experienced IP attorney can inform clients of the timetable they will be responsible for, and clarify when various terms, such as "patent pending" or "patent applied for" are supposed to be used to keep the public updated regarding where the inventor is in the patent application process.

Please contact McCloud Law Group with your Patent questions. 


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